Bullish and Bearish Candlesticks

When the closing price of the candlestick is greater than the opening price, then the candle is a bullish candlestick and is represented by a white or green candlestick real body. Conversely, if the closing price is less than the opening price, then the candlestick is a bearish candlestick and is represented by a black or red candlestick real body. Throughout the finvids.com site, the words bull or bullish candlestick (shown by a green candlestick) and bear or bearish candlestick (shown by a red candlestick) will be used.

Real Body and Upper and Lower Shadows

The rectangular area between the opening and the close of a session of trading is called the real body. The thin lines that look like candle wicks above and below the real body are called shadows. The shadow above the real body is called the upper shadow, the top end of the upper shadow corresponding to the high of the session of trading, and the shadow below the real body is called the lower shadow, where the bottom end of the lower shadow corresponds to the low of the session of trading.

Bullish Candlestick

When discussing trading sessions based on a trading day (morning to afternoon), generally speaking the two most significant times of the trading day are the opening and the close. The opening and the close create the real body of the candlestick; hence, the most important part of a candlestick is the real body. By looking at a candlestick, a person can quickly tell whether traders were eagerly buying throughout the day (bulls were in charge for the trading day) - the candlestick is green, or whether traders were eagerly selling throughout the day (bears dominated the trading day) - the candlestick is red. By looking at the size of the real body of the candlestick, a trader can tell if the bulls were significantly in charge of the trading day (a tall green candlestick) or only moderately in charge of the trading day (a small green candlestick). Similarly, if a trader sees a large red candle, he or she can assume that the selling pressure of the bears overpowered the bulls for the day; however, if the candlestick is very small and red, then the trader can see that the bears were only slightly more powerful that day than the bulls. In summary, the real body of a candlestick can summarize the outcome of a period of trading in an easy to see way – green = bulls win the trading session, red = bears win the trading session; and the height of the candle equals the margin of victory for the bulls or the bears.

Steve Nison (1994) states that “for a [bullish] candle to have meaning, some Japanese candlestick traders believe that the real body should be at least three times as long as the previous day’s real body.” (p. 20). Roads (2008) suggests the following: “determine the area covered by the difference between the close and the open. If it’s at least 90 percent of the area covered by the difference between the high and low, you have a long white candle” (p. 76). An example of a computer charting package’s definition is: “Its Close price is higher than the Open price; Its body is longer than each shadow; Its body is longer than the average body size calculated for the specified number of preceding candles” (ThinkorSwim, 2011).

Bullish Marubozu

There are specific versions of the bullish candle. The first is a very bullish candlestick called the bullish marubozu. The rough translation of marubozu is “bald or little hair” (Rhoads, 2008, p. 74). A marubozu is bald or has little hair because a marubozu has no upper or lower shadow, or at least a very small upper and/or lower shadow. This is the most extreme form of the bullish candlestick because bulls were in charge from the opening to the close; bears were unable to push prices below the opening price and the trading session ended with bulls still buying pushing prices upward until the close.

Closing Bullish Marubozu

A less bullish version, but nevertheless still bullish, is the closing bullish marubozu. With the closing marubozu, prices opened, but during the trading session, bears were able to push prices low enough to make a new low; however, bulls returned and kept buying and rising prices until the close of the day. The closing marubozu has no upper shadow because the close of the trading session is also the high of the trading session.

Opening Bullish Marubozu

The final version of the bullish marubozu is the opening bullish marubozu. The opening marubozu opens and continues higher throughout the day, never going below the opening price. Unfortunately for bulls, prices rise to a point where bears come in and are strong enough to push prices lower to the close. The fact that bears were able to possess enough power to push prices lower makes this candlestick pattern less bullish than the regular marubozu where bulls started the day in control and ended the day in control.

Bearish Marubozu

In contrast, the bearish marubozu occurs when prices open and immediately there is selling, this selloff continues until the close when selling pressure from the bears makes the close the low of the trading session. The bearish marubozu should have no upper or lower shadow.

Closing Bearish Marubozu

The closing bearish marubozu opens, but during the trading session bulls are able to move higher past the opening price and make an upper shadow; however, bears take over and for the rest of the trading session, bears push prices downwards making the closing price the low of the trading session as well.

Opening Bearish Marubozu

Though still very bearish, the opening bearish marubozu is less bearish than the previous two marubozu’s because during the trading session, bulls are able to repel the bears, thus pushing the closing price higher than the low reached during the session.

Normally, one single candlestick is not enough justification to make a trade. However, there are instances when a single candlestick can provide confirmation of a support or resistance line, a trendline, a moving average, or a breakout.

Normally, one single candlestick is not enough justification to make a trade. However, there are instances when a single candlestick can provide confirmation of a support or resistance line, a trendline, a moving average, or a breakout.

Bullish Candlestick Confirming Support

In the chart above of the S&P 500 Exchange Traded Fund (ETF) the blue support line is confirmed with large bullish candlesticks. It can be inferred from these large bullish candlesticks that bulls are entirely in charge of the market at the price around the support area. An informed trader would also notice that these two strong bullish candlesticks have created a double bottom chart pattern.

Bearish Candlestick Confirming Resistance

The chart above of the Energy SPDR ETF (XLE) shows that whenever prices reached the area of resistance, shown with the blue line above, bears came in to sell and were able to create long bearish candles downward off of the resistance line. It can be inferred from the chart that either bulls were unable or unwilling to try to push prices higher past the resistance area or the bulls were overwhelmed by the selling pressure of the bears. Either way, the resistance line was defended and kept intact.

Bullish Candlestick Confirming Uptrend

The chart above of the Dow Jones Industrial Index ETF (DIA) shows that each time the prices reached the upward sloping trend line a large bullish candlestick was formed. Bulls were very willing to buy the Dow Jones Industrial index at this trend line and were able to keep the upward trend intact. Similarly, bears were unwilling or unable to sell into the area of the upward sloping trend line, thus keeping the upward trend unbroken.

Bearish Candlestick Confirming Downtrend

Notice in the chart above of the Silver ETF (SLV) that price movement up into the downward trend line was met by large bearish candlesticks. In fact, every large bearish candlestick off of the downward trend line set the stage for at least a week of subsequent lower prices.

Bullish Candlestick Confirming Moving Average

Bullish candlesticks can be used to confirm the validity of common moving average support lines. In the chart above of the Energy SPDR Index ETF (XLE), the commonly used 50-day simple moving average was confirmed multiple times by large bullish candlesticks. Every time the prices moved into the area of the upward sloping 50-day moving average, the bulls appeared pushing prices higher and initiating multi-week uptrends before returning back to the moving average to once again be defended by yet another bullish candlestick.

Bullish Candlestick Breaks Overhead Resistance

A large bullish candlestick rising through overhead resistance can signal resistance has finally been broken. Especially when combined with large volume, a large bullish candlestick piercing through overhead resistance can signify that a new trend upward is about to begin. A 7-month consolidation in the Gold ETF (GLD) was broken with a large bullish candlestick. Bears were unable to repel this strong showing of the bulls, and for the next few months the trend was almost completely up.

Bearish Candlestick Breaks Below Support

The chart above of the S&P 500 ETF (SPY) shows a large bearish candlestick penetrating through the support line and closing below the support line. In fact the candlestick that broke through the support area was a closing bearish marubozu, meaning that bears pushed prices down to the very end of trading, bull were unable or unwilling to step in to buy at the support area like they did previously. This is a sign that the status quo is about to change, which was confirmed by a steep drop the next few trading days. Also notice the bull candle the following day – the bullish candlestick was unable to go above the recently broken support line. In fact, bears were now willing to sell or short to defend this historical support line which now becomes the overhead resistance line.

Bullish Candlestick Acting As New Support

Sometimes a strong bullish move upward resulting in a large bullish candlestick can be overdone, having moved too far too fast and becoming overbought. However, there are times when this large bullish candlestick can act as support for these retreating prices. The chart above of the Gold ETF (GLD) shows two instances of the opening of the large bullish candlestick acting as price support over time. As was taught previously, a large bullish candlestick is created when prices reach a level where bulls feel confident buying and bears are either not willing or are incapable of pushing prices lower. When prices later reach that same price level, bulls feel confident once again to buy; therefore, confirming an area of support.

Bearish Candlestick Acting As New Resistance

Long bearish candlesticks are typically oversold and consequently are subject to bullish reversals. However, the opening of the large bearish candlestick can sometimes be used as a new resistance level. As can be inferred from a large bearish candlestick, the bears were confident in selling at the area of the open of the large bearish candlestick; in addition, the bulls were unable or unwilling to buy and thus the bears were able to sell without much opposition throughout the entire trading day. When prices begin to move upward over time entering into the price levels where the long bearish candlestick was formed, the same price level is finally reached where previously the bears were able to strongly sell and the bulls were unable to push prices higher. Thus, an overhead resistance is created. The chart above of the Utility SPDR (XLU) illustrates how the opening of the long bearish candlestick acted as resistance for future prices.